Question

Angela wants to buy a car worth ₱950,000. He currently has ₱200,000 and plans to borrow the remaining ₱650,000 through the bank. Bank A offers an interest rate of 10% per year for 5 years where interest is computed on a simple interest basis. Bank B, meanwhile, offers an interest rate of 9% per year for 2 years but on monthly compounding. Both banks require payment only at the end of 3 years. Which bank's loan product should she choose?

Answer 1

Bank A

Explanation:

Loan amount = 650000

Bank A:

Simple interest after 3 years :

Loan amount * rate * time

650000 * 0.1 * 3 = 195,000

Bank B:

Compound interest formula :

A = P(1 + r/n)^nt

n = number of compounding times per period

A = 650000( 1 + 0.09/ 12)^12*3

A = 650000(1.0075)^36

A = 650000 * 1.3086453

A = 850619.49

Interest on payment = 850619.49 - 650,000 = 200619.49

Interest on Bank A product is lesser than Bank B